Why hedge funds need to stop 'monetizing poor people'

Michael Batnick
Yahoo Finance
Source: Creative Commons images
Source: Creative Commons images

This post first appeared on The Irrelevant Investor.

One of the appeals of private investment vehicles is that they’re able to seek returns that are not correlated to traditional asset classes like stocks and bonds. One corner of this universe are personal injury lawsuits, which was recently covered in a story by the New York Times.

Earlier this year, EJF Capital, a $6 billion hedge fund, began raising money for its third investment vehicle that will lend money to lawyers bringing mass-tort cases, according to a February email to prospective investors. The new fund aims to raise $300 million on top of the nearly $450 million the Arlington, Va., hedge fund has already lent to personal injury law firms.

EJF was an early mover in the business of financing mass tort litigation. Such loans can carry annual interest rates as high as 18 percent.

The field is getting crowded. Wall Street firms and other investors have become go-to financiers for many of these cases, which feature large numbers of plaintiffs who have suffered similar injuries from a consumer product.

The fact that this esoteric field is getting crowded is probably a good sign that the hedge fund world is a little too big.

Why do they need to be here in the first place? Well, like I already said, this is a good way for investors to diversify. Another reason is that a giant slug of capital is necessary to go after these type of cases, according to one of the nation’s most successful mass-tort lawyers. Tom Girardi of Girardi Keese said “funding from alternative lenders was necessary to battle companies with unlimited budgets. “If you are going to fight them, you better have the money to properly present these cases.”

Fine. Fair enough. But now some bad actors are taking things a little too far, and regulators are starting to pay attention.

As the industry booms, state and federal authorities are beginning to look into a specialized corner that provides high-interest cash advances to litigants waiting for settlements or jury awards.

In New York, state lawmakers are trying to crack down on finance firms that offer cash advances to litigants, introducing legislation that would cap the interest rates.

“We have turned our civil justice system into a profit center, and now the Wall Street sharks are circling,” said Tom Stebbins, executive director of the Lawsuit Reform Alliance of New York

If the above actions are questionable, a story from The Washington Post last night highlights practices that are unequivocally over the line.

Mariner Finance is in the business of mass-mailing checks to strangers. It’s owned and managed by a fund that is controlled by the giant private equity fund Warburg Pincus.

A former manager trainee described what they do as “basically a way of monetizing poor people.”

Mariner enforces its collections with a busy legal operation, funded in part by the customers themselves: The fine print in the loan contracts obliges customers to pay as much as an extra 20 percent of the amount owed to cover Mariner’s attorney fees…Last year, in Baltimore alone, Mariner filed nearly 300 lawsuits. In some cases, Mariner has sued customers within five months of the check being cashed.

But there’s a defense, of course. They’re just providing a public service. The company’s general counsel said “The installment lending industry provides an important service to tens of millions of Americans who might otherwise not have safe, responsible access to credit.”

Safe, responsible access to credit! Are you kidding me? This credit is a short-term solution that is only magnifying a long-term problem.

Some of the largest private equity firms today are supercharging the payday and subprime lending industries,” said Jim Baker of the Private Equity Stakeholder Project, a nonprofit organization that has criticized the industry. In some cases, “you’ve got billionaires extracting wealth from working people.

According to The Post, Mariner Finance has about 500,000 active customers, some of who were highlighted in the article.

“I wanted to go to my mother’s funeral — I needed to go to Laos,” Keo Thepmany, a 67-year-old from Laos who is a housekeeper in Northern Virginia, said through an interpreter. To cover costs, she took out a loan from Mariner Finance and then refinanced and took out an additional $1,000. The new loan was at a rate of 33 percent and cost her $390 for insurance and processing fees.

Barbara Williams, 72, a retired school custodian from Prince William County, in Northern Virginia, said she cashed a Mariner loan check for $2,539 because “I wanted to get my teeth fixed. And I wanted to pay my hospital bills.”

She’d been in the hospital with three mini-strokes and pneumonia, she said. Within a few months, Mariner suggested she borrow another $500, and she did. She paid more than $350 for fees and insurance on the loan, according to the loan documents. The interest rate was 30 percent.

I’m sure some people were bailed out by this type of cash-infusion arrangement, but this is bullshit. Sending checks to people that are desparate for money and then charging them 30% interest is not right. I don’t care if it’s disclosed in the fine print or whatever. And then making them pay 20% on top of it to cover the lender’s attorney costs is some demonic behavior.

I believe in capitalism and I like the idea of investing in return streams that don’t resemble the S&P 500, but is there no line? Do you have to rip off financially illiterate people who will do anything for some temporary relief? The minimum investment in this type of fund is $20 million. These people aren’t hurting for alpha that badly. This predatory behavior needs to end.

Source:

Hedge Funds Look to Profit From Personal-Injury Suits

A way of monetizing poor people: How private equity firms make money offering loans to cash-strapped Americans

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